Why we need postal banking

Picture this. You find your latest bank statement in the mail or search for it online and curse audibly when seeing retail account fees have gone up a few dollars a month—again.

Or maybe you walk into your local branch hoping to secure a loan only to be told you don’t qualify, forcing you to consider the nearby payday lender whose interest rates can be as high as 300% on an annualized basis.

If you live in a rural community, you might not even have a local branch to begin with, as the major banks and even many credit unions have been closing them to meet corporate targets. If you do end up face-to-face with a teller, you may be sick of them trying to sell you expensive new credit cards and other services you don’t need.

In each scenario, your frustration is compounded by an evening news broadcast declaring that Canada’s “Big 6” banks will be raising dividends for their investors—to almost a dollar a share in the case of the Royal Bank of Canada—after posting record earnings in the third quarter of 2018.

With all of these situations daily occurrences in Canada, is it any wonder that public postal banking is back on the agenda?

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On October 22, about a week after the Monitor went to print, NDP MP Irene Mathyssen was set to table a private member’s bill, M-166, proposing that a House of Commons committee be struck to study the establishment of a postal banking system under the Canada Post Corporation. The bill, should it pass, would give the committee a year to hear from witnesses and report back to Parliament on how it could be done.

This debate is important because it offers hope that we might one day see an affordable alternative financial system to the one set up by and for Canada’s banking oligopolies. Five of the so-called big six Canadian banks—RBC, BMO, CIBC, Scotiabank and TD—are in the 2018 S&P Global list of world’s largest banks by assets (National Bank of Canada being the outlier). The same number of European banks can be found on that list, despite there being 20 times more people living in the EU than in Canada.

Canadian banks also play an outsized roll within the domestic economy. Regularly, five of the big six are among the top 10 Canadian companies by market capitalization (with National Bank again the exception). In 2017, big six profits totalled $42 billion, which was a 13% increase over 2016 and twice the total for 2010. And yet a Toronto Star study last December found the banks paid the lowest tax rates in the G7—10.5% in 2015, about a third the rate for all non-financial firms in the country.

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With these kinds of profits, banking customers are right to wonder why they are paying higher service fees (or any fees at all, when you think about it). Those who have seen their branches vanish in the past five years have even more reason to gripe.

In September, the Canadian Bankers Association published its latest statistics on the number of bank branches in Canada. The count was 5,907 in 2017, over 2,000 fewer than there were in 1990 (a 34% drop). Over 400 branches were shuttered in the last three years alone (see chart).

For the big six, this is progress. RBC has promised to cut 20% of branch space in the next five years, while CIBC has is hoping 96% of all its banking transactions will be done online by the same deadline. Credit unions are not picking up the slack. According to their own industry association, there were 2,723 credit union branches in 2018 compared to 3,603 in 2002—a decline of some 880 branches in 16 years. Closures are still going on today.

As a result of these closures, banking “deserts” are increasingly common in much of rural Canada and can occur even in some inner-city neighbourhoods.

In a 2014 report for the Canadian Postmasters and Assistants Association, which assessed the potential for postal banking in Canada, I found that 45% of small towns and rural communities that had post offices did not have any bank branches to speak of (see Table 2). This was worse in B.C. and Nova Scotia there the rate was above 60%, and in Newfoundland and Labrador where more than 80% of post office towns had no banks. Ottawa’s downtown Bank Street now has more payday loans than banks.

For those lucky enough to be able to do most of their banking online, some may see closure targets as reasonable or even a good thing. But the reality is that the majority of people still use branches, and many of them on a regular basis. For arranging a mortgage, and for many small business services, face-to-face service is still essential. According to a 2015 study from the Credit Union Association, only 10% of people report never using a branch other than to access an ATM, and that’s a relatively stable number.

As we have unfortunately come to expect, the situation is even more dire among First Nations, Inuit and Métis communities. According to my calculations, of Canada’s over 700 Indigenous localities, there are only about 66 bank or credit union branches—a coverage rate of less than 10%.

In contrast, there are now more postal outlets in Canada (6,200) than the total number of bank branches. If the Crown corporation were to start offering banking and other financial services, as postal services do in many parts of the world, it would from Day 1 have a large and accessible retail chain ready to serve urban, rural and Indigenous communities alike.

The banks won’t like it, but then they have never supported the idea of having to compete with a lower-cost public alternative.

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One of the first acts of the new Dominion of Canada was the creation of postal banking in 1868. Based on a similar system in the United Kingdom, the Canadian postal savings system offered working and lower-middle-class people the chance to save money in bank accounts that were often denied to them by the large chartered banks, which went to work to undermine the project.

“The decline of the Postal Savings Bank system dates from the decision of the Minister of Finance, in 1898, to lower the interest rate on deposits,” said a Canadian Museum of History exhibit on the chronology of postal history. “The decision came in response to considerable lobbying by the chartered banks, which, during the 1890s, became much more aggressive in their pursuit of small-time bank depositors.”

Despite this early victory, it would be another 70 years before the Liberal government of the day would close down postal banking for good, in 1968, the same year the United States shuttered its own public postal bank. Fifty years on, a growing number of Canadians are coming to understand what a bad decision that was.

Today, postal banking is supported by over 600 municipalities, the Canadian Union of Postal Workers and the Canadian Postmasters and Assistants Association, as well as the National Pensioners Federation. The NDP passed a motion in favour of postal banking at its last congress in February 2018, thus Mathyssen’s private member’s bill to the House of Commons.

So how would it work? Postal banking can be run in many different ways. The simplest would be as a subsidiary of Canada Post, with banking services set up in one major region of the country at a time. The easiest way to set this new entity up would be as a Crown corporation in the same manner as the other federally-owned banks (see Table 3).

At first, basic banking services such as savings and chequing accounts and bill payment could be offered at much lower costs than you’d find at big six banks. From there, a postal bank could expand into offering other financial services such as mortgages, business and personal loans, foreign exchange, investments, insurance and alternatives to payday loans.

If this makes you nervous, consider that Canada Post has about 100 years of banking experience. The legislation that enabled postal banking is still on the books, and the Crown corporation already delivers some financial services. It sells money orders, credit cards and has an online bill delivery service, epost, which could easily be modified to allow bill payment as well. Canada Post frontline staff are unionized, well-trained and used to dealing with customers of the friendly and frustrated variety. It’s a perfect match, when you really think about it.

Likewise, the federal government already administers four very successful banks, all of which made a profit totaling $3.2 billion in 2016. These banks could provide support for the new postal bank as they already have 242 offices across the country, provide loans to farm families and businesses, and offer savings products such as treasury bills and, until recently, Canada Savings Bonds. Staff expertise from over 7,000 public servants could be seconded to the new postal bank.

While a new postal bank would require initial investments from the federal government, the profitability of postal banks worldwide shows that any new investments in equipment and training would be quickly repaid. Importantly, Canadians are willing to pay for postal banking services. In a poll carried out for the government’s Postal Service Review Task Force in 2016, 11% of people said they would definitely use some financial services at Canada Post.

There are 29.65 million Canadians over 18, meaning that 3.26 million Canadians would immediately be interested in the new banking services.Since 47% of all respondents in that poll (and 27% of Indigenous respondents) said new banking products were a good or excellent fit for Canada Post, the future for increasing these numbers looks excellent. At least 11% of businesses consulted in that study said they would use postal banking, which provides another excellent customer base on which to grow a retail service for big and small business.

The more you look at these numbers, the more you realize the good arguments for public, postal banking (see sidebar) far outweigh the bad, which is mostly the possibility that Canada’s big six private banks will be annoyed. So what are we waiting for?

Good reasons to bank with Canada Post

High fees. Bank fees today are out of control. In a recent survey by RateHub, millennials and boomers reported paying around $8 per month in fees, which works out to just under $100 per year. Gen-Xers said they were paying $13 on average, or nearly $160 a year. For example, an unlimited chequing account will cost you around $14.95/month or $179.40 a year. Then there are the costs for taking out cash from another bank’s ATM, which can hit $3.00 per transaction and NSF fees (on bounced cheques) are now $48 at major banks. In the U.K. most ATM transactions at another bank are free.

We need an alternative to payday loans. Payday loan rates, which are set by each province, are usurious. At their lowest (currently in Ontario, Alberta, New Brunswick and B.C.), a $100 loan at $15 interest over two weeks still amounts to an annual interest rate of 391%! Quebec and Newfoundland and Labrador outlawed payday loans, but they are now widely available online and, as in bricks-and-mortar locations, only accorded to people who have a reliable income source. A new postal bank could offer alternative products to payday loans at much lower rates, perhaps similar to credit cards, which at their most expensive are under 30% annually. For example, a 29% interest rate on a $100 loan would cost about $1.11 over two weeks instead of $15.

Banking services could help support mail service, home delivery, and local post offices. In other countries, postal banking helps support other post office services. Mail delivery is itself an important service in a large country like Canada, where the cost of mailing a letter 9,300 kilometers (the width of the country) is the same as reaching someone in your home town. In fact, home delivery needs to be expanded again, after it was cut back by the Harper government. A postal bank could provide some of the resources to do that.

John Anderson is an independent researcher and consultant. This article draws from the author’s June 2018 study on postal banking for the Canadian Union of Postal Workers and an earlier report on the topic, Why Canada Needs Postal Bankaing, for the CCPA.